President's Letter | The Year In Review | Highlights of 2003

ACHIEVING GROWTH
During 2003, our total assets surpassed the $800 million mark, increasing $65 million to $813 million, a nine percent increase from the $748 million reported a year ago. At December 31, 2003, our total earning assets represented approximately ninety-four percent of total assets. These earning assets increased proportionally over the past twelve months ÷ an increase of nine percent, or $62 million from last year"s total of $705 million.

During the past twelve months, net loans, which represents sixty-one percent of our total earning assets, surpassed the $460 million mark for the first time, growing five percent to $465 million at year-end from the $443 million at this same time in 2002. In particular, our commercial real estate portfolio grew by eight percent during this past year. The overall total loan growth was also supported with increases in the indirect loan portfolio as well as home equity lines of credit. This strong growth was offset somewhat by a decrease in the residential real estate loan portfolio due to continued re-financings that were experienced during 2003.

The Corporation"s Investment/Securities portfolio increased sixteen percent during 2003. At year-end, this portfolio totaled $292 million, up $41 million compared to year-end in 2002. This investment portfolio, which represents thirty-eight percent of our total earning assets is comprised primarily of various U.S. Government Agency and Municipal Securities strategically purchased with maturities and interest rates that fit in the bank"s asset/liability and interest rate risk models.

Deposit totals at year-end exceeded the $600 million level, reaching a record level of $628 million in December. This represents a seven percent increase over the $588 million reported at this time in 2002. Most of those increases were in savings and time deposits. We also had modest growth in our balances of short term Borrowed Funds ÷ specifically in the category of Securities sold under Repurchase Agreements, which includes our corporate Sweep Accounts. These balances increased accordingly Ê from $51 million in 2002 to $58 million at year-end 2003.

PROFITABILITY
Net income for 2003 improved by twenty percent to $9.5 million from 2002"s net income of $7.9 million. Earnings per basic and diluted share for 2003 were reported at $0.75. Adjusted to reflect the two-percent stock dividend paid in November 2003, this represents an increase of $0.12 per share, or nineteen percent from 2002"s $0.63. Return on average assets (ROA) was 1.20 percent and return on average equity (ROE) was 11.77 percent, both improving substantially from the 1.12 percent ROA and 10.27 percent ROE that were reported in 2002.

Total Interest income earned on loans and investments generated $44 million during 2003 ÷ approximately the same dollar amount that was reported in 2002. However, the total interest expense during 2003 was $14 million, a substantial decrease from the $17 million we paid during 2002. The result of these two components Ê net interest income was $30 million, an increase of eleven percent, or $3 million during the past twelve months. The net interest income to earning assets margin was 4.13% as compared to 4.16% in 2002.

ENHANCING SHAREHOLDER VALUE
From a shareholder prospective, our cash dividends declared and paid in 2003 increased $0.05, or nine percent, to $0.60 per share, up from $.55 per share last year. Historically, this marks the eighth consecutive year that we have been able to increase our cash dividend per share. These numbers have been adjusted to reflect the two percent stock dividend that the Board declared and paid in November. That transaction marked the twenty-eighth consecutive year that a stock dividend was declared and paid to shareholders.

At year-end, Farmers National Banc Corp"s cash dividend yield was approximately four percent, ranking it very near the top in this category of all publicly traded financial institutions in the state of Ohio. In addition, during 2003, we saw the current market value on our stock increase thirteen percent from a closing price of $14.00 in December 2002 to a closing price of $15.75 in December 2003. On a quarter-over-quarter basis, the average weighted price per share of our common stock traded at a market price of $16.38 during the fourth quarter of 2003 as compared to a price of $13.19 during the last quarter of 2002. This equates to a twenty-four percent increase over that period.

During 2003, we aggressively re-purchased shares of our own common stock in open market transactions under the guidelines of our Stock Repurchase Program for 2003. In summary, we re-purchased 257,997 shares at an average weighted cost of $16.09 per share.

These shares are included in the total of Treasury Stock on the corporate balance sheet. Looking back over the past three years, we have re-purchased a total of 588,936 shares at an average cost of $13.43 per share. This equates to approximately $8 million dollars of our capital that was invested in our own company.

Our Dividend Reinvestment Plan continues to give opportunities for shareholders to obtain additional shares of our common stock. During 2003, through reinvested cash dividends and supplemental cash contributions, we issued approximately 280,000 new shares of common stock at an average price per share of $16.15. Combining all the factors Ê the Stock Repurchase Program, the cash dividend payout, and the Dividend Reinvestment Plan ÷ the Shareholders Equity in this corporation remained relatively unchanged. The total at year-end was $80.2 million as compared to $80.9 million at this time in 2002. On December 31, 2003, the Book Value per share was $6.31 and we have a total Market Capitalization of approximately $200 million.

ASSET QUALITY AND RISK MANAGEMENT
Current market and local economic conditions create challenges for the banking industry, with a number of banks experiencing erosion in credit quality. Our banking franchise strongly believes that it is prudent risk management to monitor credit quality. We achieve this through a conservative and disciplined underwriting process that is the cornerstone of our credit culture. We supplement our underwriting with frequent loan monitoring, risk grading, an active loan review process, and a very efficient collection and recovery department. The combination of all these elements gives us the adequate monitoring and control systems in place to meet all regulatory requirements, maintain our asset quality and ensure the overall safety and soundness of this company.

The provision for loan losses was $870,000 for the year decreasing from $1,080,000 in 2002. The lower provision was due to our ability to manage three key ratios regarding our asset quality. The company"s non-performing loans to net loans ratio was .33% at year-end, improving from .39% in 2002. On December 31, 2003, the Allowance for Loan Losses as a percentage of non-performing loans ratio was a very solid 436%, improving from the 393% at this same time in 2002. Another way to express this data is that our loan loss reserves exceed the dollar amount of non-performing loans by 4.36 times. The third ratio that supports our credit culture is the ratio of net loan losses as a percentage of average net loans. For the full year 2003, our net charge-offs amounted to just over $1 million, representing .22% of average net loans versus .17% last year at this time Ê keeping us right in line with our peer group data in this category for banks our size.

NEW CORPORATE HEADQUARTERS
During last year"s report, I shared our vision of supporting the growth and expansion for this company with the announcement of a proposed new corporate administration building that was to be built on the Green in Canfield. At this time, I am most proud to report that this new 21,000 square foot office building opened this past December.

This new two-story building, which borders to the south of our Main Banking Office, will serve as the home of our corporate offices to serve our shareholders. It also provides new offices for all administration functions such as human resources, branch administration, marketing, and accounting. In addition, the new facility includes meeting and training rooms and will house the bank"s electronic and Internet banking services for retail and commercial customers. The new corporate headquarters building is in fact, a solid long-term investment for our company ÷ creating more efficiency to support our management team to administer the growth and on-going expansion that is anticipated for this company.

At last year"s Annual Shareholder Meeting in March, Mr. David C. Myers formally retired as a Director after serving on the Board for the past fifteen years. David served this company well Ê his insight and leadership helped guide this company through prosperous times and his contributions will be long remembered and appreciated. We welcomed Mr. Earl R. Scott to fill Mr. Myers un-expired term as a director. Mr. Scott, a Certified Public Accountant, and Partner in the accounting firm, Reali, Giampetro & Scott has been a valuable addition to our board. I commend our directors for a top quality selection.

OUTLOOK
We have no control over the trend of the economy, but we certainly can control how we operate within it. Our management team has remained focused on providing outstanding customer service and delivering innovative banking and investment solutions that will fuel continued growth for our company.

We plan to continue to build on the momentum realized in 2003 and concentrate on improving all business lines. Our goals and objectives for 2004 are to enhance our non-interest income producing products and services ÷ new products such as a privileged overdraft product and the continued development of our PrimeVest Financial Services. Our branch models will now include a more formal proactive customer-calling program with the cross selling of all products and services in our existing and new markets. Lastly, we are determined to improve on efficiencies within our entire banking operations and continue to keep non-interest expenses below peer group averages.